The big three in economics: Adam Smith, Karl Marx, and John Maynard Keynes

263 Pages·2015·19.254 MB·English

by  Keynes, John Maynard;Marx, Karl;Skousen, Mark;Smith, Adam

Big
The
Three
in
Economics
OTHER ACADEMIC BOOKS
BY MARK SKOUSEN
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(editor)
The Investor’s Bible:
Mark Skousen’s Principles of Investment
Puzzles and Paradoxes in Economics
(co-authored with Kenna C. Taylor)
Economic Logic
The Power of Economic Thinking
Vienna and Chicago, Friends or Foes?
The Compleated Autobiography by Benjamin Franklin
(editor and compiler)
Big
The
Three
in
Economics
Adam Smith
Karl Marx
and
John Maynard Keynes
Mark Skousen
M
.E.Sharpe
Armonk, New York
London, England
Copyright 2007 by Mark Skousen
All rights reserved. No part of this book may be reproduced in any form
without written permission from the publisher, M.E. Sharpe, Inc.,
80 Business Park Drive, Armonk, New York 10504.
Library of Congress Cataloging-in-Publication Data
Skousen, Mark.
The big three in economics : Adam Smith, Karl Marx, and John Maynard Keynes /
Mark Skousen.
p. cm.
Includes bibliographical references and index.
ISBN-10: 0-7656-1694-7 (cloth : alk. paper)
ISBN-13: 978-0-7656-1694-4 (cloth : alk. paper)
1. Economists—History. 2. Economics—Philosophy. 3. Economists—Biography.
4. Smith, Adam, 1723–1790. 5. Marx, Karl, 1818–1883. 6. Keynes, John Maynard,
1883–1946. I. Title.
HB76.S58 2007
330.15092’2--dc22 2006020466
Printed in the United States of America
The paper used in this publication meets the minimum requirements of
American National Standard for Information Sciences
Permanence of Paper for Printed Library Materials,
ANSI Z 39.48-1984.
~
BM (c) 10 9 8 7 6 5 4 3 2 1
Dedicated to
The Big Three in my life,
My editor, my friend, and my wife,
Jo Ann Skousen

Contents
Introduction ix
Photos follow page 104
Chapter 1. Adam Smith Declares an Economic Revolution
in 1776 3
Chapter 2. From Smith to Marx: The Rise and Fall of
Classical Economics 46
Chapter 3. Karl Marx Leads a Revolt Against Capitalism 64
Chapter 4. From Marx to Keynes: Scientific Economics
Comes of Age 105
Chapter 5. John Maynard Keynes: Capitalism Faces Its
Greatest Challenge 133
Chapter 6. A Turning Point in Twentieth-Century Economics 163
Chapter 7. Conclusion: Has Adam Smith Triumphed Over
Marx and Keynes? 191
Bibliography 219
Index 231
About the Author 243
vii

Introduction
During the past three centuries, three economists stand out as archetypes,
symbols of three distinct approaches to economic philosophy. In the
eighteenth century, Adam Smith, a student of the Scottish Enlighten-
ment, expounded a “system of natural liberty” (what we might term a
liberal democratic order consisting of an unfettered market and limited
government), and elucidated how a nation flourishes and advances the
standard of living of its citizens. In the nineteenth century, the German
philosopher Karl Marx attracted and inspired workers and intellectuals
who felt disenfranchised by industrial capitalism and sought radical so-
lutions to inequality, alienation, and exploitation of the underprivileged.
Finally, in the twentieth century, the British economist John Maynard
Keynes sought to stabilize a crisis-prone market system through activist
fiscal and monetary government policies.
The Pendulum and the Totem Pole
The stories and ideas of these Big Three economists are told in context
of a larger history I have described in greater detail in The Making of
Modern Economics. In the introduction to that work, I describe two
possible approaches to writing about the lives and ideas of economists,
what I term the spectral versus the hierarchal approach.
The most popular method of analysis I describe as a pendulum, by
which historians place each economist somewhere along a political
spectrum, from extreme left to extreme right. Figure A illustrates the
pendulum approach used in many economics textbooks.
The Pendulum Approach to Competing
Economic Theories
Simple though it is, I see several problems with the spectral ap-
proach. First, it treats Karl Marx and Adam Smith as coequals, that is,
ix
x INTRODUCTION
Figure A The Pendulum Approach to Competing Economic Theories
“extreme” in their positions and therefore equally bad. By implication,
neither man’s position is sensible and must be rejected. The result is
a pendulum-like swing between the two extremes, eventually coming
to rest in the middle. Consequently, the moderate, middle-of-the-
road position held by John Maynard Keynes appears to be the more
balanced and ideal. But is his system the way to achieve growth and
prosperity? Or is the middle of the road simply the path toward big
government and a cumbersome welfare state?
I suggest as an alternative the “hierarchal” approach. In Indian
folklore, the higher one’s placement on the totem pole, the higher the
rank of significance. Instead of comparing economists horizontally
on a pendulum or spectrum, we might choose to rank them by height
according to the same standard of achievement. Using this totem pole
structure, I would reformulate the diagram according to Figure B.
The Totem Pole of Economics
I have chosen a ranking system consistent with the opinions of most
economists. A large majority of economists and historians of economic
thought consider Adam Smith the greatest of the Big Three. His model
of competitive markets constitutes the “first fundamental theorem of
welfare economics,” what George Stigler called the “crown jewel”
of economics, the “most important substantive proposition in all of
economics” (Stigler 1976, 1201).
Next on the list is John Maynard Keynes. Despite substantial
criticism of the Keynesian model, it continues to endure as a mac-
roeconomic model in institutional analysis and policy matters. As a
defender of bourgeois values, Keynes supported individual liberty,
but on a larger scale, he thought that macroeconomic intervention is